Escrow Disputes

Escrow is a critical part of many California real estate transactions. Buyers, sellers, lenders, and other parties may entrust an escrow holder with substantial funds, deeds, loan documents, and written instructions governing the closing. When funds are improperly withheld or released, instructions are not followed, or a transaction fails to close, the resulting dispute can jeopardize valuable property and financial rights.

Our law firm represents buyers, sellers, property owners, investors, businesses, and other parties in California escrow disputes. We evaluate the purchase agreement, escrow instructions, amendments, communications, deposit records, title documents, and other evidence to determine the parties' rights and available remedies.

An escrow generally involves the deposit of money, documents, or other items with a neutral third party for delivery after specified conditions have been satisfied. In a real estate transaction, the escrow holder may receive the buyer's deposit, prepare or process escrow instructions, coordinate necessary documents, obtain payoff information, facilitate recording, and disburse funds when the conditions for closing have been met.

An escrow holder is an agent and fiduciary of the principals to the escrow. However, that relationship is limited. The escrow holder is ordinarily required to comply faithfully with the parties' written instructions but does not serve as the attorney, advocate, or general adviser of either side. It does not have unlimited authority to resolve disputes, rewrite the parties' agreement, or decide which party should prevail when conflicting demands arise.

The escrow instructions are therefore central to most disputes. They identify the conditions that must occur before money or documents may be released and may address the purchase price, deposit, closing date, title requirements, authorized disbursements, recording instructions, fees, prorations, and cancellation procedures.

The purchase agreement must also be reviewed because not every contractual obligation is incorporated into the escrow instructions. Financing, inspections, disclosures, contingencies, liquidated damages, mediation, arbitration, and attorney-fee provisions may be governed principally by the purchase agreement and related documents.

Disputes frequently arise over the buyer's initial deposit when a real estate transaction is cancelled or fails to close. The buyer may demand the return of the deposit based on an inspection, appraisal, financing, title, or other contractual contingency. The seller may contend that the buyer removed the applicable contingencies, failed to perform, or breached the purchase agreement and that the seller is entitled to retain some or all of the deposit.

The escrow holder ordinarily cannot resolve this substantive disagreement. If the buyer and seller submit competing demands, the escrow holder may continue holding the funds until it receives conforming written instructions, a settlement agreement, or a court order. In some circumstances, the escrow holder may file an interpleader action and ask the court to determine who is entitled to the money.

Entitlement to a deposit depends on the particular facts and governing documents. The relevant issues may include:

• Whether a contractual contingency remained in effect
• Whether the contingency was properly removed or waived
• Whether a party provided a required notice to perform
• Whether the buyer or seller timely performed the agreement
• Whether the cancellation complied with contractual procedures
• Whether a liquidated-damages provision is valid and enforceable
• Whether the seller sustained recoverable damages
• Whether mediation or arbitration is required
• Whether attorney's fees may be recovered

Usually, neither side should assume that cancellation automatically determines ownership of the deposit. The complete contractual and evidentiary record should be reviewed by a legal expert.

An escrow holder may face liability when it fails to perform an obligation required by the escrow instructions. These disputes may involve claims that the escrow holder:

• Released funds without proper authorization
• Disbursed funds to the wrong recipient
• Closed escrow before required conditions were satisfied
• Failed to record an authorized deed or security instrument
• Recorded an incorrect or unauthorized document
• Disregarded amended escrow instructions
• Failed to obtain a required signature or approval
• Mishandled a payoff demand or lien release
• Miscalculated an authorized disbursement
• Failed to provide an accurate accounting
• Delivered documents or funds prematurely
• Refused to follow valid, mutually approved instructions

An escrow holder is generally not liable merely because a transaction produced an unfavorable result for one party. Its obligations ordinarily depend on the scope of the written instructions and the duties it agreed to perform. A careful comparison between those instructions and the escrow holder's actual conduct is therefore essential.

Depending on the circumstances, potential claims may include breach of contract, negligence, breach of fiduciary duty, fraud, conversion, or declaratory relief. The elements and viability of each claim depend on the relationship between the parties, the instructions, the alleged misconduct, causation, and resulting damages.

Real estate transactions have become frequent targets for business-email compromise and wire-transfer fraud. A criminal may gain access to an email account or impersonate a real estate professional, escrow officer, buyer, seller, or other participant. The criminal then sends fraudulent wiring instructions directing the victim to transfer funds to an unauthorized account. These incidents may involve:

• Compromised email accounts
• Spoofed email addresses or domains
• False escrow or title-company communications
• Last-minute changes to wiring instructions
• Fraudulent electronic signatures
• Impersonation of transaction participants
• Unauthorized access to confidential closing information
• Rapid transfers through multiple financial accounts

When wire fraud occurs, immediate action is important. The affected party should promptly contact the sending and receiving financial institutions, request a recall or freeze, preserve all electronic communications, notify appropriate authorities, and consult counsel. Delays may allow the funds to be transferred into additional accounts or moved outside the United States.

Potential responsibility cannot be determined solely by identifying the person who sent the fraudulent message. The investigation may require examination of account security, prior communications, verification procedures, contractual duties, representations, cybersecurity practices, and the conduct of every participant who transmitted, received, or relied on the wiring instructions.

Our law firm's experience with internet fraud, cybersecurity, subpoenas, and electronic evidence can be particularly valuable in escrow wire-fraud matters. Relevant evidence may include email headers, login histories, Internet Protocol addresses, telephone records, bank records, access logs, multifactor-authentication records, and communications maintained by third-party service providers.

Escrow disputes may overlap with disagreements involving title, deeds, liens, financing, and recorded instruments. A transaction may close with an incorrect vesting designation, an unreleased lien, an unauthorized deed, or a document that does not reflect the parties' agreement. The escrow holder, title company, broker, lender, notary, or another participant may have played a separate role in the disputed events.

Escrow and title services should not automatically be treated as identical. In some transactions, the same business may provide related services, but the duties arising from escrow instructions may differ from the duties associated with a title search or title insurance policy.

These matters require a coordinated review of the purchase agreement, escrow instructions, preliminary title report, title policy, deeds, loan documents, payoff demands, settlement statements, and county recording information.

An escrow dispute may be resolved through written demands, direct negotiations, mediation, arbitration, interpleader, or civil litigation. The appropriate approach depends on the urgency of the matter, the amount in dispute, the governing agreements, the available evidence, and whether funds or property rights require immediate protection.

Before taking action, the parties should preserve:

• The purchase agreement and all addenda
• Original and amended escrow instructions
• Cancellation notices and demands for the deposit
• Emails, text messages, and electronic attachments
• Wire instructions and bank records
• Preliminary title reports and title policies
• Closing and settlement statements
• Deeds, loan documents, and recorded instruments
• Inspection, appraisal, and disclosure records

Early evaluation can help identify the responsible parties, applicable claims and defenses, contractual deadlines, dispute-resolution requirements, and potential methods of protecting the funds or property. Our law firm assists clients with earnest-money deposit disputes, competing escrow demands, failure to follow escrow instructions, unauthorized disbursements, closing and recording problems, escrow wire fraud, and related real estate litigation. If you are involved in a California escrow dispute, contact our law firm to discuss the transaction, relevant documents, and available legal options.